Industrial strength

The robust IIP numbers are a surprise, but a turnaround cannot be confirmed yet

Next Tuesday, will the RBI take a cue from the suddenly robust industrial production numbers and go for a rate cut? Will the numbers undergo a drastic downward revision next month and if so, would the GDP growth rate projections for the year begin to look conservative again? Most critically, do the trends encourage companies to begin investing again in greenfield projects, or will they wait for cues from the next budget? None of these questions were answered by the industrial output data released by the Central Statistics Office for October. The numbers surprised on the upside, coming in at 8.2 per cent ó almost double the 4.5 per cent estimated in a Reuters poll. Within manufacturing, all the segments showed improvement, with capital goods production showing the most impressive turnaround. The numbers, which had averaged a minus 13.7 per cent till the end of September, have grown to a positive 7.5 per cent in October. If the trend persists, the economy should be heading towards a strong recovery in the second half of the year. Allied with the impressive recovery in consumer durables (cars, washing machines), the Indian economy would seem to have kicked off the sloth. The actual figures for car sales in October support these numbers. Sales were at a 22-month high.

The discordant notes in the data are the low base from last October, which makes the recovery look impressive, the re-emergence of a slide in November and inflation. Car sales in November dipped by 8.25 per cent; fortnightly credit figures from the banking sector have also fallen. The general consumer price index in November has almost touched double digits from 9.75 per cent in October. It would seem that even the slightest sign of growth returning to the economy has spurred inflation. Worse, inflation is now clearly higher in rural India than in urban areas. Partly, this reflects the rising purchasing power in villages, but given the greater difficulty of organising the food logistics chain beyond the cities, the challenges of income security become higher.

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